The Central Bank of Russia Has Made a Cautious Step towards Easing of the Interest Rate Policy

On Friday, 16 September, the Central Bank of Russia reduced the key rate by 50 b.p. to 10% per annum. So, the CBR has made a cautious step towards easing of the interest rate policy, having declared at the same time that it does not plan any further cuts in the interest rate till 2017.

It is to be noted that in the past year the CBR reduced the key interest rate by 1 p.p. from 11% to 10%, while the rate of inflation fell more dramatically from 15.8% as of the end of July 2015 to 6.6% in September 2015.

The main factor behind such a policy pursued by the CBR is that it intends to stick strictly to the goal it set and reduce the rate of inflation to 4% by the end of 2017. According to the CBR, the main obstacle consists in prevalence of higher inflationary expectations, which largely exceed the inflationary target. In its official press release, the CBR stressed that market participants were expecting a prompt reduction of interest rates and a higher rate of inflation, so to overcome those sentiments the regulator kept the interest rate at a high level.

Indeed, inflationary expectations are an essential factor behind price rises in Russia and maintenance of positive real interest rates is an effective way of reducing them. If the CBR fails to achieve the declared goal (4%) by 2017 it will be a serious blow to its repute. In that case, the monetary authorities will find it hard to carry out the inflation targeting policy as economic agents cease to believe in the regulator’s capacity to fulfill its promises regarding the inflation rate targets. Considering the above, the decision in question is correct. At the same time, it is important to understand that if the interest rate is kept at a high level for a long period of time risks of growth in the rate of unemployment and protracted recession may arise.

Yevgeny Goryunov, Researcher